01—Abstract
Summary
Summary of the 10-K filed February 23, 2017. Cited figures are marked; the original filing is the authoritative source.
Equity Residential (EQR) closed 2016 as a substantially repositioned company after an unusually large year of portfolio dispositions.
The company sold 98 consolidated properties (29,440 units) for about $6.8 billiona, including the $5.365 billion Starwood Portfolio, and returned roughly $4.1 billion to holders of shares and OP units through two special dividends totaling $11.00 per share. Reported 2016 diluted EPS of $11.68 was inflated by a $4.0 billion net gain on property sales, so investors should focus on operating metrics rather than headline earnings. The company now owns 302 properties and 77,458 units, concentrated entirely in six coastal markets (Boston, New York, Washington D.C., Southern California, San Francisco, Seattle), and exited South Florida, Denver and New England (ex-Boston).
Underlying operations weakened in 2016. Same-store revenue grew 3.7%b and same-store NOI grew 3.9%, but management guided 2017 same-store revenue growth of only 1.0% to 2.25% and same-store NOI growth of 0.0% to 2.0%, citing new luxury supply and slowing tech and financial job growth in New York and San Francisco. Same-store expenses are expected to rise 3.0% to 4.0%, driven by real estate taxes (4% to 5%) and payroll (4% to 5%).
Normalized FFO available to common shares and units fell to $1.18 billionc in 2016 from $1.32 billion in 2015, mainly because of lost NOI from dispositions. Balance sheet and liquidity are strong. Total debt fell to $8.99 billion from $10.92 billion, debt to total market capitalization was 26.8%, and the unsecured revolver was replaced with a $2.0 billion facility maturing in 2022 at LIBOR plus 0.825%.
Credit ratings are A- (S&P), Baa1 (Moody's, positive outlook) and A- (Fitch) at the operating partnership level. The company has no development starts budgeted for 2017, and a 2017 dividend policy tied to 65%d of Normalized FFO guidance means regular payouts should track operating results more closely.
02—Key points
Key Highlights
- Portfolio transformation completed: 98 consolidated properties (29,440 units) sold for $6.8 billion in 2016, including the $5.365 billion Starwood Portfolio, leaving 302 properties and 77,458 units in six coastal markets.
- Special dividends totaling $11.00 per share/unit ($8.00 in March and $3.00 in October 2016, roughly $4.1 billion in aggregate) were paid from disposition proceeds, and 2016 regular dividends were $2.015 per share.
- Reported 2016 diluted EPS of $11.68 was driven by a $4.04 billion net gain on sales of real estate, versus $2.36 in 2015; this is non-recurring in nature.
- Same-store revenue grew 3.7% and same-store NOI grew 3.9% in 2016, but 2017 guidance is much weaker at 1.0% to 2.25% revenue growth and 0.0% to 2.0% NOI growth.
- Normalized FFO available to common shares and units declined to $1.18 billion in 2016 from $1.32 billion in 2015, reflecting lost NOI from the dispositions.
- Total debt reduced to $8.99 billion from $10.92 billion; roughly $2.0 billion of secured and unsecured debt was retired, and debt-to-total-market-cap stood at 26.8%.
- Development pipeline is shrinking: 2,064 units remain under development with $300 million of 2017 spending budgeted, no new starts budgeted for 2017, and $40 million expected for 2018.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2016filed February 23, 2017Financial Statements
FY2016 against FY2015
| Line item | FY2016FY2015 | Change |
|---|---|---|
| Revenue | $2.43B$2.74B | −11.6% |
| Operating Expenses | $1.57B$1.74B | −9.6% |
| Operating Income | $856.09M$1.01B | −15.2% |
| Interest Expense | $482.25M$444.49M | +8.5% |
| Net Income | $4.48B$908.02M | +393.4% |
| EPS (Basic) | $11.75$2.37 | +395.8% |
| EPS (Diluted) | $11.68$2.36 | +394.9% |
| Shares Outstanding (Basic) | 365.00M363.50M | +0.4% |
| Shares Outstanding (Diluted) | 381.99M380.62M | +0.4% |
05—Questions
Frequently Asked Questions
Why did EQR's 2016 earnings jump so sharply, and is that sustainable?
Diluted EPS rose to $11.68 from $2.36, primarily because of a $4.04 billion net gain on real estate sales tied to the Starwood Portfolio and other 2016 dispositions, plus lower depreciation after those properties were sold. These gains are one-time in nature. Investors should look at Normalized FFO, which fell to about $1.18 billion from $1.32 billion, as a better indicator of recurring earnings power.
How much cash did shareholders receive from the 2016 sales?
Shareholders and OP unitholders received two special dividends totaling $11.00 per share/unit: $8.00 paid March 10, 2016 (about $3.0 billion) and $3.00 paid October 14, 2016 (about $1.1 billion). In addition, regular quarterly dividends of $0.50375 per share were paid, and total distributions declared for 2016 were $13.015 per share.
What does the 2017 outlook imply for same-store performance?
Management expects same-store revenue growth of 1.0% to 2.25%, expense growth of 3.0% to 4.0% and NOI growth of 0.0% to 2.0%. New York (expected revenue decline of about 1.5%) and San Francisco (about 1.0% growth, with limited pricing power) are the weakest markets, while Los Angeles (about 3.6%) and Seattle (about 4.25%) are expected to lead. Elevated new luxury supply and slower tech and financial sector job growth are the main headwinds.
How strong is the balance sheet after the disposition program?
Leverage is conservative. Total debt was $8.99 billion at year-end, debt-to-total-market-cap was 26.8%, and the unsecured debt covenants were comfortably met (total debt to adjusted total assets of 35.4% versus a 60% limit). The company has a $2.0 billion revolver maturing 2022 with about $1.88 billion available as of February 2017. About 73.8% of real estate by investment value is unencumbered, which supports future financing flexibility.
Does the 2016 sale of the Starwood Portfolio leave EQR more or less exposed to specific risks?
Exposure is more concentrated. EQR now has all of its properties in six coastal markets, which management views as higher-quality and higher-barrier markets but which also increases sensitivity to local economic shocks, rent control and property tax increases (real estate taxes are guided up 4% to 5% in 2017). The company also retains some tax-protection obligations from the Archstone acquisition that may limit future sales and refinancing decisions, and Lehman's Archstone indemnification period ends February 27, 2017.
06—Continue